Recent Share Performance and Business Scale

Nokia Oyj (NYSE:NOK) trades at $13.98 and has moved slightly down 0.06% over the past day, while showing a 67% total return over the past 3 months and 2.5x over 3 years.

The company reports annual revenue of $19.996b and net income of $774m, with year on year revenue growth of 4.6% and net income growth of 25.2%, highlighting the scale of its global network business.

Looking at the bigger picture, Nokia Oyj’s share price has fallen 5.7% over the last day but still shows strong momentum, with a 67.2% 90 day share price return and a 176.3% 1 year total shareholder return. This points to a sharp reassessment of its prospects and risk profile.

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With Nokia Oyj’s share price up sharply over the past year and trading above some valuation estimates, the key question now is whether the stock still offers a margin of safety or if markets are already pricing in future growth.

Price-to-Earnings of 87x: Is It Justified for Nokia Oyj Stock?

On a simple snapshot, Nokia Oyj trades on a P/E of 87x, which sits above the last close price context of $13.98 and suggests investors are paying a high multiple for current earnings compared with several benchmarks.

The P/E ratio compares the company’s share price to its earnings per share and is a quick way to see how much investors are willing to pay for each dollar of Nokia Oyj’s earnings. For a network and telecoms equipment business where earnings can be cyclical and influenced by large contracts and one off items, a high P/E can indicate that the market is placing a strong value on future profit growth, or that current earnings are temporarily low.

Here the picture is mixed. On one hand, Nokia’s earnings are forecast to grow 25.17% per year and are expected to grow faster than the broader US market, which can help explain why some investors might accept a richer multiple. On the other, Nokia’s current net profit margin is 3.9%, lower than last year’s 6.3%, and the company reports a low return on equity of 3.7%, with return on equity still forecast to stay below 20% in three years. Large one off losses in the last 12 months have also affected reported earnings quality, which can distort the P/E ratio and make it less straightforward as a guide to sustainable profitability.

Compared to the US Communications industry average P/E of 32.1x, Nokia Oyj’s 87x multiple is far higher. This means the stock is pricing in much stronger earnings or a recovery from currently depressed profits relative to sector peers. When set against an estimated fair P/E of 51.1x, the current multiple also stands well above the level that regression based fair value suggests the market could move toward over time if expectations moderate.

Result: Price-to-Earnings of 87x (OVERVALUED)

However, Nokia Oyj’s rich 87x P/E and current discount to the US$11.93 analyst price target mean that any disappointment in earnings quality or contract timing could quickly cool sentiment.

Another View on Nokia Oyj Valuation

The SWS DCF model offers a different angle on Nokia Oyj. On this framework, the stock at $13.98 sits above an estimated future cash flow value of $12.69, which points to an overvalued reading and suggests less room for error if growth or margins underwhelm.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Nokia Oyj for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 44 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.